RBA steps forward
The RBA scaled back purchases of longer-dated bonds and opted against extending the yield-target horizon at its meeting earlier today, after keeping interest rates unchanged at a record low. Once the current AUD 5 billion a week QE program ends in September, it will shift to AUD 4 billion a week with a review in mid-November. This third round of bond buying will take place across a three-month period rather than six months, with Governor Lowe saying the “probabilities have shifted”.
Upbeat assessment of the economy
Effectively, the bank has now watered down its commitment to keeping its policy rate unchanged until 2024, with the statement providing a positive appraisal of the economic recovery.
This is forecast to continue, with business and household balance sheets in good shape and the labour market improving faster than expected. That said, in comments after the RBA’s statement, Governor Lowe said the bank would need much more positive wage growth to expect rate hikes in 2023 which does not seem likely.
Aussie buyers to the fore
Much depends on how quickly the economy continues to recover, especially with regard to when the Fed starts to normalise policy and how the aussie reacts.
With RBA tapering out in the open, the market is preparing for additional lowering of the pace of bond buys in the coming quarters before potentially paving the way for rate hikes in 2023.
The AUD is bid today with AUD/USD up over 0.88% at one point and close to 0.76. This is also the retracement highs made after the Fed move and previous lows in February and March, so may prove resistance to more upside. Prices have bounced strongly since making new cycle lows at 0.74442 after the US NFP report last week, breaking above the 200-day SMA today. Bullish momentum is picking up and a double bottom pattern could be forming if the 0.76 barrier can be beaten.